An anti-subrogation regulation in Kansas preventing insurers from issuing policies containing subrogation clauses came into conflict with the Federal Employees Health Benefit Act (“FEHBA”), but the Tenth Circuit Court of Appeals ruled that federal common law preempted the Kansas regulation.

After receiving benefits from her federal employee health insurance plan following an accident, the insured reached a settlement with the other driver’s insurance company. Her insurer, Blue Cross, sought reimbursement for the benefits paid pursuant to the subrogation clause in the insured’s insurance policy through the United States District Court for the District of Kansas, who ordered the insured to reimburse Blue Cross, finding that the Federal Employees Health Benefits Act of 1959 preempted a Kansas regulation that prohibited both subrogation and reimbursement clauses in insurance policy contracts. The insured appealed the ruling to the United States Court of Appeals for the Tenth Circuit. On October 29, 2015, the appeals court affirmed the district court’s ruling.

As noted by the appeals court, the “grant to the carrier of the rights of subrogation and reimbursement” is contained in the Office of Personnel Management’s (“OPM”) contract with Blue Cross. The appeals court also observed that attachments to the contract provided that if the insured was injured by a third party and the insurance plan paid benefits for that injury, recoveries obtained by the insured must be used to reimburse the insurer. The authorization for OPM to enter that contract is granted by FEHBA, which authorizes OPM to “enter into contracts with insurance carriers and promulgate regulations to carry out the program.”

The appeals court noted that FEHBA’s preemption provision at 5 U.S.C. § 8902(m)(1) provides that contracts entered into by OPM with insurers “shall supersede and preempt any State or local law, or any regulation issued thereunder, which relates to health insurance or plans.” The appeals court observed that earlier this year, on January 7, 2015, OPM published a proposed rule regarding preemption of state laws such as the Kansas law at issue, which prohibited subrogation and reimbursement clauses. That rule, according to the court, was promulgated on May 21, 2015, and stated that [a]ll health benefit plan contracts shall provide that the Federal Employees Health Benefits (FEHB) carrier is entitled to pursue subrogation and reimbursement recoveries, and shall have a policy to pursue such recoveries.”

The Kansas law at issue, on the other hand, provides that “[n]o insurance company or health insurer…may issue any contract or certificate of insurance in Kansas containing a subrogation clause, or any other policy provision having a purpose or effect similar to that of a subrogation clause, applicable to coverages providing for reimbursement of medical, surgical, hospital, or funeral expenses.”

Citing then-Circuit Judge, and now Supreme Court Justice Sonia Sotomayor’s decision in a similar Second Circuit case that found that 5 U.S.C. §8902(m)(1) “federal law preempting state law may be federal common law or the FEHBA statute provisions themselves, but it must be law—not contract terms,” the appeals court found that federal common law “displaces” the Kansas anti-subrogation regulation under the doctrine set forth in Boyle v. United Technologies Corp., 487 U.S. 500 (1988), a case in which a federal contractor was protected from design-defect liability (normally an issue of state law) after a helicopter crash because the United States had approved the specifications for the allegedly faulty escape hatch, the equipment conformed to those specifications, and the supplier had warned the United States about the dangers in the use of the equipment. In that case, the Court found that when state law was contrary to a contract term actually selected by the federal agency in a discretionary decision, the conflict between government policy and the state tort liability of the contractor the contractor would be resolved by making the contractor immune from liability when the defect was the product of a discretionary decision by the government.

The appeals court in this case found that the contract between Blue Cross and the government was a matter of “uniquely federal” interest, and that the government’s interests in attracting able workers to the workforce and maintaining those workers’ health and welfare were overwhelming interests. The subrogation or reimbursement provision in FEHBA-authorized contracts with insurers is “assuredly a discretionary function” negotiated by government officials and is also “undermined by antisubrogation laws,” stated the appeals court. The government’s interest in uniformity is similarly implicated by allowing state law to override subrogation and reimbursement requirements, observed the appeals court.

The appeals court also found that § 8902(m)(1) itself, though “ambiguous,” was not entitled to the presumption against preemption because of the “federal-interest exception.” The appeals court held that “the federalism concern (respecting state sovereignty) behind the presumption against preemption has little purchase in this case.” Interpreting the language of §8902(m)(1) without the presumption, the appeals court held that OPM’s “longstanding and persuasively explained view that subrogation and reimbursement provisions are directly tied to employee health benefits and advance the congressional purposes served by § 8902(m)(1)” was of “sufficient weight” to persuade the appeals court to agree with Blue Cross, and the government’s, view of §8902(m)(1) as preemptive of state law.

For the above stated reasons, the Tenth Circuit Court of Appeals affirmed the judgment of the district court.